California’s Cap-and-Trade Reforms: October 2018 Comment Letter

Summary

Near Zero submitted a comment letter to ARB on its proposed regulations to implement AB 398, the cap-and-trade extension bill. Our comments focused on three issues:

The serious risk that excess allowances in the program will frustrate its ability to deliver the emission reductions called for in the 2017 Scoping Plan.

A potential loophole in the proposed definition of “direct environmental benefits” for carbon offsets that should be eliminated in the final regulation.

The need to work toward a science-based policy strategy.

1. ARB has not shown how the proposed market design will keep emissions below California’s legally binding limit in 2030.

We begin with what should be a straightforward observation, but which in the present rulemaking has seemingly become an overarching controversy. The Board is legally obligated to demonstrate that its portfolio of climate regulations is consistent with the economy-wide greenhouse gas emission limits set by AB 32 and SB 32.

Unfortunately, ARB has not offered any analysis to indicate the proposed regulation will deliver the reductions the 2017 Scoping Plan calls for from cap-and-trade. What little analysis the Board has provided on the stringency of the market design is based on a factual error that calls into question the ability of the proposed market design to deliver emission reductions consistent with the 2017 Scoping Plan.

At the same time, the Board’s proposed regulations include a profound shift in emphasis about the role of carbon pricing that diverges from nearly every public statement the Board has previously made about cap-and-trade’s functional role in state climate strategy. Previously, the Board assumed that the cap-and-trade program would ensure a particular quantity of reductions, supplying sufficient reductions to keep emissions below the state’s mandated limits—but in the present rulemaking process the Board has shifted to describing the role of cap-and-trade as ensuring a “steadily increasing carbon price.”

Furthermore, because the proposed market design is unlikely to limit emissions as called for in the 2017 Scoping Plan, it is important to emphasize that the state’s overall climate strategy may need reform. At this point, it is clear that the proposed market design bears little relationship to the strategy identified in the 2017 Scoping Plan. Should the Board finalize the market design proposed in the current rulemaking, the 2017 Scoping Plan will no longer serve as a reasonable representation of overall state climate policy strategy. Additional policy efforts would then be needed to put the state on track to achieving its 2030 climate goal.

To give a sense of how a large allowance bank at the end of 2020 can interfere with the ability of the program to limit emissions in line with 2030 goals, we consider a scenario in which California’s and Quebec’s emissions are assumed to fall at 2% per year through 2020, consistent with the 2017 Scoping Plan Scenario, but then California’s emissions are held roughly constant at 2020 levels through 2030. In this scenario, the program caps are likewise binding through 2030 on a cumulative basis, even though annual 2030 emissions greatly exceed program caps. Given the overshoot of covered emissions above program caps through 2030, it is unlikely that this scenario is consistent with California’s total emissions declining enough to be below the 2030 limit.

2. The proposed definition of “direct environmental benefits” for carbon offsets contains a potential loophole that should be closed.

AB 398 sets new limits on offset use in the post-2020 market period, with no more than half of the limit coming from projects that do not produce a “direct environmental benefit” (or DEB) to California air or water quality. As noted by the Independent Emissions Market Advisory Committee, the proposed regulatory text contains an ambiguity that could potentially allow any offset project to claim a DEB on the basis of its project-level avoided greenhouse gas emissions or project-level greenhouse gas emission reductions. The proposed definition clearly forecloses this option with respect to claiming a DEB to California air quality, but the path for claiming a DEB to California water quality via climate impacts remains ambiguous with respect to greenhouse gas emissions. Because every offset project could make this argument, any such interpretation would render AB 398’s DEBs language superfluous and effectively eliminate this statutory provision—contrary to clear legislative intent behind AB 398’s limits on post-2020 offset use.

3. Working toward a science-based policy strategy

We are mindful that this letter is critical of the analytical basis staff present for California’s flagship climate policy. And we are mindful that some Board staff have not appreciated our comments in the past. We hope that despite our different perspectives, there are those at ARB who find our analysis useful in evaluating strategies for successfully achieving California’s ambitious climate policy goals.

Our goal is to evaluate the scientific basis for California’s critically important climate policy strategies. Near Zero remains agnostic as to how policymakers decide to accomplish their climate goals, but is firmly committed to evaluating the plausibility of any proposed strategy on the basis of the available evidence.

We respectfully urge the Board to consider tightening the market design in the current proposal, which cannot reasonably be said to deliver on the role ARB identified for this program in last year’s Scoping Plan. If the Board is unwilling or unable to do so, however, we request the Board to (1) call for a future rulemaking to address allowance overallocation, and (2) begin a process for revising the Scoping Plan to reflect the actual market design adopted in the current process.